A factory has two production departments (P1, P2) and two service departments (S1, S2). Overheads after primary apportionment are P1 $80,000, P2 $60,000, S1 $30,000 and S2 $20,000. S1 serves P1 60% and P2 40%. S2 serves P1 30%, P2 50% and S1 20%. S1 does not provide any service to S2. What are P1's total overheads after all service department costs have been reapportioned?

Correct answer: D) $106,400

Explanation

Because S1 does not serve S2, reapportion S2 first: P1 30% = $6,000, P2 50% = $10,000, S1 20% = $4,000. S1 now totals 30,000 + 4,000 = $34,000, split P1 60% = $20,400 and P2 40% = $13,600. P1 = 80,000 + 6,000 + 20,400 = $106,400. (P2 = $83,600, and 106,400 + 83,600 = 190,000, which equals total overheads.) The direct method, which ignores the service S2 gives S1, would give $105,500.